Apr 7 The Oil Sands Weekly

Syncrude outage narrows Canadian crude discounts . . .

Light synthetic crude production has been reduced to zero at the Syncrude operation for the month of April. Majority-owner SuncorEnergy had previously indicated pipeline shipments should reach up to 50% capacity sometime during the month of April. Syncrude's Mildred Lake upgrader normally produces 350,000 bbl/day of upgraded bitumen.

The light oil shortfall is also affectingConocoPhillips' Surmont facility. Heavy oil production from the SAGD plant is blended with upgraded bitumen (light synthetic crude) to meet pipeline specifications. Reuters is reporting that production has been cut by 40% at the facility, which has a nameplate capacity of 150,000 bbl/day of heavy oil. NexenEnergy is also reporting production cuts at its Long Lake SAGD operation, which normally produces about 40,000 bbl/day of heavy oil.

The crude shortage has sent differentials for both CanadianLight and WesternCanadianSelect to multi-year lows. Canadian Light, which normally trades at a US$3/bbl discount, is now trading at just US$0.70 below WTI. The HeavyOilDiscount has narrowed to less than US$10/bbl, versus a pre-fire differential of almost US$15. Condensate prices in Edmonton, which normally trades on par with WTI, is now a few dollars higher.

The Mildred Lake upgrader is not expected to return to normal operation until late-May or early June. The oil outages are ill-timed for US refineries that are just emerging from their spring turnarounds and gearing up for the summer driving season.

The federal government has released their long awaited report of recommendations on how to modernize the way major projects are evaluated. The recommendations were drafted by a four-member Expert Panel that consulted with Canadians across the country over the past 6 months. The team was mandated to review the country's environment assessment process and restore public confidence in the system.

The panel says they heard a wide variety of views, from full-on support to all-out opposition.

Quebec and BC reported the most angst over pipeline reviews. Albertans expressed difficulties in keeping up with the numerous projects and short time-frames for assessments. Consultations with Indigenous Peoples in general reported perceptions of having their rights and interests ignored.

The panel suggests the term "environmental assessment" be rephrased as "impact assessment" encompassing more social, economic, health and cultural issues, including impacts on climate change.

Another key recommendation is the "one project, one assessment" principle. Under the current process, environmental assessments require reviews by federal, provincial, territorial, municipal and Indigenous governments, where each level of government can only regulate matters within its own jurisdiction. The panel says all jurisdictions need to find a way to work together and recommends a harmonization of federal assessments with provincial/territorial reviews.

The report also acknowledges that the NEB is sometimes perceived as being biased towards the energy industry, since it is also the country's energy regulator and heavily staffed with people from the energy sector.

The group recommends forming an "Impact Assessment Commission" and splitting assessments into three phases: a Planning Phase, Study Phase and Decision Phase. The panel also recommends a major increase in funding, public participation and oversight from Indigenous Peoples.

Canada's environmental review process has been criticized for being far too slow, cumbersome and costly. The panel suggests the new Impact Assessment process will restore confidence, reduce conflict and be more efficient.

The report is now open to comments from the general public. The federal government has promised any changes made to the review process will not affect projects currently under review, such as Energy East.

This week's other notable Canadian energy news . . .

Teck Resource's proposed Frontier Oil Sands Minehas now entered the public consultation phase. Proponents are invited to submit their comments in writing to the Canadian Environmental Assessment Agency on whether the information provided is adequate. Frontier is a planned 260,000 bbl/day oil sands mining facility located about 110 km north of Fort McMurray. The first phase is expected to have a production capacity of 170,000 bbl/day.

Cenovus Energyhas delayed moving its head office employees from Calgary's iconic Bow Tower to the soon-to-be-completed Brookfield Place. Cenovus was due to take possession of the new office space later this year. Spokesperson Reg Curren says the company's "space requirements changed dramatically with the downturn of the past two years." Cenovus has moved its relocation date to the end of 2018. The latest estimates peg Calgary's office vacancy rate at almost 27%.

Gas prices in the metro Vancouver area topped $1.40/L on news that Phillips 66 has extended the maintenance shutdown on its 160,000 bbl/day refinery in Washington State. BP's near-by Cherry Point refinery also went down for maintenance earlier in the week, as the facility switches to more gasoline production in preparation for the summer driving season. West Coast gas prices tend to be quite volatile due to very limited refining capacity.

The NEB is making CSA Z662 Oil and Gas Pipeline Systemavailable to the general public (for free) as part of a one-year pilot program. The 678-page safety standard covers technical aspects of design, construction, operation, maintenance, deactivation, and abandonment of oil and gas pipelines, commonly referenced in NEB pipeline regulations. The NEB will be picking up the tab for document access through March 2018.

The NEBhas also approvedWoodfibre LNG's request to extend its export license from 25 to 40 years. The company has approvals in place to export a maximum of 3.34 billion cubic meters of LNG annually from Squamish, BC. The 40 year window begins on the day of the company's first export.

This week's notable US energy news . . .

Republican lawmakers in Minnesotahave advanced legislation that would allow Enbridge to bypass regulatory roadblocks for the proposed replacement of its Line 3 pipeline. The Democrats have raised concerns over the potential for an oil spill and Native American land rights. Republican Pat Garofalo says opposition to replacement of old pipeline is the work of "environmental extremists." Line 3 was originally installed in the 1960s and is still in operation. The 1,660 km pipeline runs from Hardisty, Alberta through Saskatchewan, southern Manitoba, across the state of Minnesota to a terminal in Superior, Wisconsin. The Canadian government approved replacement of the line north of the border.

Sunoco Logisticshas agreed to sell its retail gas stations to Japan's Seven & i Holdings (operator of 7-Eleven convenience stores) for US$3.3 billion. The deal includes 1,108 stations in Texas and the eastern US, boosting 7-Eleven's presence to about 10,000 locations in the US and Canada. Sunoco Logistics is a subsidiary of Energy Transfer Partners.

Yet another natural gas mega-pipeline was announced this week, this time by NAmerico Partners LP, with financial backing from private-equity firm Cresta Energy. The proposed 753 km Pecos Trail Pipeline would transport 1.85 Bcf/day of gas from expanding production in the Permian to Gulf Coast refineries and petrochemical hubs in Corpus Christi, Texas. Natural gas production in the West Texas area is expected to more than quadruple by 2025. Kinder Morgan and Enterprise Products Partners are planning similar pipeline expansions in the same area.

Alaska's Department of Environmental Conservationreported an oil leak into the state's southern Cook Inlet, originating from an 8 inch pipeline, 23 meters below the surface. Flow in the pipe has been stopped but the volume of oil spilled is still undetermined.

Natgas market about to get more glutted . . .

Qatar has lifted a 12-year moratorium on further gas development from its North Field, which it shares with Iran. The North Field is the world's largest natural gas field, accounting for almost all of Qatar's gas production and 60% of the country's export revenues. The country plans to expand capacity by 2 Bcf/day when production begins in 2022-2024. Despite a looming LNG glut, the government says "gas demand is always growing" and it should be "a good market" in about 5 years time.

Qatar is currently the world's largest LNG exporter, but will soon be overtaken by Australia. Iran is also quickly ramping-up gas production from the same field, and may surpass Qatar's gas output by mid-2018.

This week, Russian President Vladimir Putin also said his country aims to become the world's largest LNG producer.

Around the world this week . . .

ExxonMobil and QatarPetroleumhave signed a agreement with the government of Cyprus to drill for oil and gas in Block 10, off the country's southern coast. This is ExxonMobil's first exploration in the eastern Mediterranean. Recent large finds in neighbouring Egyptian and Israeli waters have attracted many of the world's oil majors to Cypress, including Eni, Total and NobleEnergy.

ExxonMobil has also confirmed it is currently in talks to acquire a refining-petrochemical complex in Singapore from Jurong Aromatics Corp (JAC). JAC went into receivership in September 2015. The relatively new US$2.4 billion complex produces paraxylene, a raw material for textiles and bottles. Exxon is looking to boost its fuel and chemical production in Asia and already produces 1 million tonnes/year of paraxylene in the region.

BPhas agreed to sell its Forties Pipeline System to chemicals manufacturer Ineos for US$250 million. The 169 km Forties pipeline was commissioned in 1975, transporting oil from 85 offshore oil fields in the North Sea and Norway on behalf of about 40 companies.

Mining-giant Glencorehas agreed to sell 51% of its oil products storage business to China's HNA Innovation Finance Group for US$775 million. The assets will be held within a newly formed company to be named HG Storage International Ltd.

WEEKLY ENERGY STATISTICS

US IMPORTS OF CANADIAN CRUDE

million bbl/day  preliminary data by EIA

US OIL INVENTORIES

million bbls  data by EIA

US OIL PROD'N & RIG COUNT

million bbl/day  data by EIA & Baker Hughes

3,572k

+364k ▲ 11.3%BBL/D CDN EXPORTS TO US

9,199k

+52k ▲ 0.6%BBL/D US PROD'N

535.54M

+1.57M ▲ 0.3%BBL US INVENTORIES

672

+10 ▲ 1.5%US RIG COUNT

CHANGE WK/WK

Oil rig counts in the US hit a 19-month high this week, as another 10 rigs were put into service. The number of oil rigs in service in Canada fell another 13 to just 42 this week. Drilling activity normally declines in Canada due to the spring thaw.

Libya’s crude production rebounded to 660,000 bbl/day this week after force majeure was lifted on the Zawiya export terminal, allowing production to resumed from the Sharara oil field. Sharara is producing about 160,000 bbl/day but has a total production capacity of 330,000 bbl/day.

Iraq says it remains on track to increase crude output to 5 million bbl/day by the end of this year, up from the current 4.4 million. Oil revenues account for about 95% of the country's budget. Under the terms of OPEC's production quotas, Iraq has agreed to reduce output to 4.351 million bbl/day. However, that deal is set to expire in the summer unless OPEC and partners can negotiate an extension next month in Vienna.

S&P Global/Platts estimates OPEC's output declined to 31.85 million bbl/day in March, 960,000 bbl/day below levels of last October. Last month's declines came from Nigeria, Libya, Angola, Venezuela and the UAE.

WEEKLY MARKET SUMMARY

CURRENCIES  WEEKLY CLOSE

Friday close  data by Bank of Canada & ICE

101.12

+0.90 ▲ 0.9%USD INDEX

74.57

-0.62 ▼ 0.8%CDN DOLLAR

2.38%

-0.02 ▼ 0.8%US 10Y Bond

1.59%

-0.04 ▼ 2.5%CDN 10Y Bond

CHANGE WK/WK

In their latest Business Outlook Survey, the Bank of Canada says the economy is showing signs of recovery, although there are still signs of excess capacity in Prairie provinces. Most Canadian firms remain optimistic on US growth prospects, and remain hopeful some of that expansion will find its way north of the border. Investment and employment intentions are also showing signs of improvement.

This week's other notable Canadian economic data . . .

After a strong start to the year, Canada posted a $972 milliontrade deficit in February, dragged lower by weak aircraft sales and canola exports to China. This is the first deficit after three consecutive monthly surpluses. Exports of energy products (including natural gas, crude oil and refined products) rose 12% m/m to $8.3 billion while imports rose 8% m/m to $2.7 billion.

StatsCan estimates 19,000 jobs were created in March. Despite the gains, the national unemployment rate rose to 6.7% as more Canadian reported searching for work.

Employment in Alberta rose by 20,000 in March, all full-time positions, the most since 2014. The province's unemployment rate ticked higher from 8.3% to 8.4% as more Albertans return to the labour force. However, the resource sector remains weak, shedding another 2,300 jobs last month.

US employment data was confusing at best this week as strong ADP numbers were released on Wednesday but US government data showed only 98,000 jobs were created in February, about half what was expected. Bad winter weather was blamed for the shortfall. The US employment rate ticked lower from 4.7% to 4.5%. The US dollar had another good week, gaining almost 1%.

OIL PRICES  WEEKLY CLOSE

Friday close, USD/bbl  data by CME Group

55.24

+2.41 ▲ 4.6%BRENT USD/BBL

52.24

+1.64 ▲ 3.2%WTI USD/BBL

51.35

+1.85 ▲ 3.7%CDN LT USD/BBL

42.70

+3.52 ▲ 9.0%WCS USD/BBL

CHANGE WK/WK

Western Canadian Select (WCS) had another spectacular week, now up almost 30% from the lows of mid-March.

A brief outage of the 180,000 bbl/day Buzzard oil field in the North Sea temporarily boosted oil prices earlier this week.

The global spread between light and heavy oil continues to narrow this week as Saudi Arabia offers more price discounts for light oil sales to Asia. Saudi Aramco has reduced the official selling price of its benchmark Arab Light grade by US$0.30/bbl for May deliveries. This is the second consecutive monthly discount.

As part of OPEC's agreed quotas, Saudi Arabiahas reduced output by about 500,000 bbl/day, largely weighted towards medium and heavy grades. Coupled with a rise in US light oil exports, world oil markets are facing a shortage of heavy crude and surplus of light oil, reducing the spread between the grades.

Goldman Sachs released another oil price outlook this week, insisting that crude oil demand is outstripping supply. The investment firm estimates WTI will reach US$57.50/bbl by the middle of this year, averaging US$55 in the second half of 2017. Citing plenty of spare global production capacity and rising US shale output, Goldman is sticking to its US$50-55 medium-to-long term price forecast for WTI, trading at a US$3 discount to Brent.

ENERGY SECTOR PERFORMANCE

Friday close  data by TSX & NYSE

CANADIAN & US EQUITIES

Friday close  data by TSX & NYSE

SECTOR SUMMARY

Friday close  data by TSX & NYSE

TSX ENERGY STOCKS  WEEKLY CHANGE

Pembina Pipeline (PPL) has increased their monthly dividend from $0.16 to $0.17 per share (+16%). This is the company's sixth consecutive annual increase. Pembina also announced a $325 million expansion of its pipeline infrastructure between Lator and Namao, Alberta, related to its Phase III Expansion project which is expected to come into service by July. CEO Mick Dilger says he is "encouraged" by a pick-up in business activity so far this year and remains confident in the company's growth prospects.

Pengrowth Energy (PGH) has cut their debt load by $530 million after having prepayed US$300 million in senior notes and $126.6 million in convertible bonds.

Raging River Exploration (RRX) stock spiked and later fizzled this week on a Bloomberg report that the company has put itself up for sale. CEO Neil Roszell says the company's Board of Directors have hired a financial advisor "to explore ways to further the company's business plan" as part of its normal course of business, but that review has since been completed.

Cenovus (CVE) has issued US$2.9 billion of senior notes to help finance its recent acquisition of ConocoPhillips' oil sands and Western Canadian gas assets. The company also confirmed it has closed on the sale of $3 billion worth of shares at $16/share.

As a result of last week's acquisition, Cenovus stock will have a larger weighting in various Canadian indices, including the TSX Composite, TSX 60 and TSX Capped Energy Index.

Despite higher oil prices, Cenovus shareholders remain concerned over debt loads, send the stock to another 52-week low on the TSX this week.

This week's 52-week highs on the TSX include Veresen (VSN), Enerflex (EFX) and Shawcor (SCL). Pembina stock also closed at a 2-year high this week.

NYSE ENERGY STOCKS  WEEKLY CHANGE

Total's ADR shares on the NYSE (TOT) reached a 52-week high this week.